Suppose Avia Company classified its portfolio of securities that cost $ 130,000 as avail- able for sale. Ifthe market value ofthe securities is $125,000 at the date ofthe balance sheet, the securities must be shown on the balance sheet at the lower amount. In this case, the un- realized loss will nol be shown on the income statement. Instead of going through net in- come to retained earnings, the loss will go through comprehensive income to accumulated other comprehensive income in the shareholders' equity section of the balance sheet. The loss will be shown after retained earnings, either alone-and labeled as an unrealized loss from investments in securities-or combined with other nonincome statement sains and losses-and labeled as accumulated other comprehensive income.
Selling the Securities
When a firm sells any of these securities-trading, available for sale, and held to maturity- the gain or loss on the sale is calculated like other accounting gains and losses. The book value of the security at the time of the sale is compared to the selling price. The selling price is often called the proceeds from the sale. If the book value is greater than the proceeds, the firm will record a loss on the sale. If the book value is less than the proceeds, the firm will record a gain on the sale. Gains and losses from the actual sale of the securities are both realized-the sale has actually happened-and recognized-the relevant amounts are shown on the income statement.
Appendix A: Stuples Finunciol Reporls
541
5 4 2 A P P E N D I X A . S T A P L E S F I N A N C I A L R E P o R T S
ITEM 8 APPENDIX C
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS \_/
Page
Report of Independent Registered Public Accounting Firm. C-2
Consolidated Balance Sheets-January 28,2006 and January 29,2005 C-3
Consolidated Statements of Income-Fiscal years ended January 28,2006, January 29,2005 and
January 37,2004 C-4
Consolidated Statements of Stockholders' Equity-Fiscal years ended January 28,2006, January 29,2005
andJanuary 3t,2004. C-5
Consolidated Statements of Cash Flows-Fiscal years ended January 28,2006, January 29,2005 and
J a n u a r y 3 1 , 2 0 0 4 . . . c-6
C-7 toC-32 Notes to Consolidated Financial Statements
Reprinted with permission from Staples Financial Report.
A P P E N D I X A . STAPLES F I N A N C I A L R E P O R T S Report of Independent Registered Public Accounting Firm
543
Board of Directors and Shareholders Staples, Inc.
We have audited the accompanying consolidated balance sheets of Staples, Inc. and subsidiaries as of January 28, 2006 and January29,2005, and the related consolidated statements of income, stockholders'equity, and cash flows for each of the three years in the period ended January 28,2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Staples, Inc. and subsidiaries at January 28,2006 and January 29,2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 28, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note B to the consolidated financial statements, in fiscal year 2003, the Company changed its method of accounting for cash consideration received from vendors to conform with Emerging Issues Task Force Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor."
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Staples, Inc,'s internal control over financial reporting as of January 28,2006,based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2006 expressed an unqualified opinion thereon.
/s/ EnNsr & YouNc LLP Ernst & Young LLP Boston, Massachusetts
Februarv 27.2006
54 A P P E N D I X A . S T A P L E S F I N A N C I A L R E P O R T S
STAPLES, INC. AND SUBSIDIARIES Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
January 2E, Jantary 29,
2006 200s
ASSETS Current assets:
C a s h a n d c a s h e q u i v a l e n t s . . . . f i 9 7 7 , 8 2 2 $ 9 9 7 , 3 1 0
Short-term investments 593,082 472,23L
Receivables,net.... 576,672 485'126
Merchandise inventories, net . . . I,706,372 1,602,530
Deferred income tax asset 149,257 86,04I
Prepaid expenses and other current assets . 14t,339 138,374
Total current assets . 4,144,544 3,781,612
Property and equipment:
Land and buildings
Leasehold improvements. . . . Equipment
Furniture and fixtures.
Total properfy and equipment . . . .
Less accumulated depreciation and amortization Net property and equipment. . . .
Lease acquisition costs, net of accumulated amortization . . Intangible assets, net of accumulatedamortization Goodwill
Other assets Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable
Accrued expenses and other current liabilities.
Debt maturing within one year Total current liabilities Long-term debt . .
Deferred income tax liability.
Otherlong-term obligations . . . . . Minority interest
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued.
Common stock, $.0006 par value, 2,100,000,000 shares authorized; issued 829,695,L00 shares at January 28,2006 and 813,049,139 shares at January 29,2005
Additional paid-in capital
Cumulative foreign currency translation adjustments . Retained earnings.
Less: treasury stock at cost,99,253,565 shares at January 28,2006 and 68,547,587 shares at Iantary29,2005 ..
Total stockholders' equity
Total liabilities and stockholders'equity .
705,978 649,175 884,853 762,946 1.,330,181 t,1,40,234
672,931. 597,293 3,593,943 3,149,648 1,835.549 1.,548,774 r,758,394 1,600,874
34,885 38,400 240,395 222,520 1,,378,752 1,,321,,464
1.I9,619
$ 7,676,58e
106,578
$ 7,071,448
$ t,241,433 954,1.84
t,244 2,L96,86t
a \ 1 9 ) 1
23,374 178,150
$ 1,435,815 L,041,200
2,89r 2,479,906
527,606
\ x 4 a
233,426
4 i 1 t
498 2,544,692
87,085 3,529,170
(r,73s,e74)
L A)\ A1'l
$ 7,676,589
488 2,254,947
114,427 2,9r8,163 (r,072,829)
4,1,15,196
$ '7,071,,448 See notes to consolidated financial statements.
A P P E N D I X A . STAPLES F I N A N C I A L R E P O R T S STAPLES. INC. AND SUBSIDIARIES
Consolidated Statements of Income (Dollar Amounts in Thousands, Except Share Data)
Fiscal Year Ended
January 28, Janaary29, January31,
2005 2004
2006
$14,448,378 $12,967,022 10,343,643 9,468,890
4,],04,735 3,498,132 545
Sales
Cost ofgoods sold and occupancy costs . Gross profit
Operating and other expenses:
Operating and selling General and administrative.
Amortization of intangibles. . . . Total operating expenses Operating income Other income (expense):
Interest income Interest expense.
Miscellaneous income (expense)
Income before income taxes and minority interest Income tax expense.
Income before minority interests Minority interest
Net Income.
per common share Diluted
See notes to consolidated financial statements.
$'J.6,078,852 11,493,370
4,595,542 2,617,958 64I,296
13,008 3,272,262 t,3r3,290
59,937 (56,773)
(1,945) 1,31,4,499
479,792 834,707
298
$ 834,409
2,359,551, 610,568 8,743 2,978,862 1,,125,873
3t,042 (39,888)
(1,455) 1.,LL5,572
407,r84 708,388
' 2,',J.67,764 524,094
7,986 2,699,844
798,288 10,135 (3L,575)
1,264 778,1L2 2g7,g}t 490,211
$ 490,211
$ 708,388 Earnings
Basic 1..1.4
t . t 2
0.95 $ 0.68 0.93 $ 0.66
546 A P P E N D I X A . S T A P L E S F I N A N C I A L R E P O R T S
STAPLES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity
(Dollar Amounts in Thousands)
For the Fiscal Years Ended January 28,2006,January 29,2005 and January 31,2004
Balances atFebruary 1,2003 . Equity Offering
Issuance of common stock for stock options exercised.
Tax benefit on exercise of options
Contribution of common stock to Employees' 401(K) Savings I P l a n . . . .
Sale of common stock under Employee Stock Purchase Plan.. . . Issuance of Performance Accelerated Restricted Stock. . . . Reissuance of Treasury Stock. . . . . .
Net income for the year
Foreign currency translation adjustments.
Changes in the fair value of derivatives (net of taxes of $17 ,1'26) . Purchase of treasury shares. . . .
Other. . .
Balances at January 31, 2004 . . .
Issuance of common stock for stock options exercised Tax benefit on exercise of options
Contribution of common stock to Employees' 401(K) Savings P l a n , . .
Sale of common stock under International Savings Plan Sale of common stock under Employee Stock Purchase Plan . . . Issuance of Performance Accelerated Restricted Stock. . . . . Stock split
Net income for the year Common stock dividend
Foreign currency translation adjustments,
Changes in the fair value of derivatives (net of taxes of$9,729). . Purchase of treasury shares. .
Balances at Januara 29, 2005 . . .
Issuance of common stock for stock options exercised. . . . Tax benefit on exercise of options
Contribution of common stock to Employees' 401(K) Savings P l a n . . .
Sale of common stock under Employee Stock Purchase PIan . . . Issuance of Performance Accelerated Restricted Stock. . . . Stock split and cash paid in lieu of fractional shares.
Net income for the year Common stock dividend
Foreign currency translation adjustments. .
Changes in the fair value of derivatives (net of taxes of $8,332). . Purchase of treasury shares. . . .
Balances at January 28. 2006
Additional Cumulative
Common Paid-In Translation Retained Treasury Comprehensive Stock CapflCl Adjustments Earnings Stock Income
s 2ee $1,484,833 $ 11,481 $1,719,091 $ (ss6,812) $484,710
1
28
490,21r 96,075 (26,ss4) (4,31s)
490,2r1 96,075
(26,ss4)
$ 81,002 $2,209,302$ (s61,Oee)9559,'732 8
8
252,964 r2t,545
30,613 9,136 16,1.69 18,389 9',7
(36'7)
{ 1 0 1 2 1 7 0
r87,163 69,257 L3,3LL 124 19,098 32,778 (163)
$ 3 1 6 8
1
I O J
46,861.
(13,436)
708,388 (99,s27)
$ 2,818,163
834,409 (r23,402) (1s,837)
(11,s0s)
(511,730)
$(1,o'72,829)
708,388 46,86r (13,436)
$ 741,813
834,409 (1s,837) (11,sOs)
(661 14\\
$(1.,73s,974) $807,067
$ 488 o
92,254,947 t59,'726 56,354 15,426 23,t8L 35,979
(e21)
$ I14,42',7
1
$ 498 $2,s44,692 $ 87,08s $3,s29,r',70 See notes to consolidated financial statements.
A P P E N D I X A . STAPLES F I N A N C I A L R E P O R T S STAPLES. INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Dollar Amounts in Thousands)
Fiscal Year Ended January 28,
2006
547
January 29, 2005
$ 708,388 278,845
t,595 65,771 (49,786) (63,747) (8,736) 92,355 107,609
56,915 r,179,208 (335,435) (1rr,657)
(29,330) 10,709,696 (t0,246,652\
(14,378)
January 31, 2004 Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization. . . Deferred income tax (benefit) expense.
Other.
Change in assets and liabilities, net of companies acquired:
I n c r e a s e i n r e c e i v a b l e s . . . . . . . r J . i . . . . (Increase) decrease in merchandise inventories . . . . .
Increase in prepaid expenses and other assets.
Increase (decrease) in accounts payable.
Increase in accrued expenses and other current liabilities.
Increase in other long-term obligations Net cash provided by operating activities Investing activities:
Acquisition of property and equipment . . . . Acquisition of businesses, net of cash acquired Investment in joint venture, net of cash acquired Proceeds from the sale of short-term investments. . . Purchase of short-term investments.
Net cash used in investing activities tr'inancing activities:
Proceeds from the sale of capital stock
Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans.
Proceeds from borrowings. . . Payments onborrowings . ....
Repayments under receivables securitization agreement. . . . Cash dividends paid
Purchase of treasury stock, net
Net cash (used in) provided by financing activities Effect of exchange rate changes on cash.
Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end ofperiod.
See notes to consolidated financial statements.
$ 834,409 303,900 (99,551)
44,997 (80,166) (97,538) (L5,646) '1,87,402 1,36,746 20,922 1,,235,369
(456,103) (40,560) (1.6,636) 8,097,199 (9,2r9,049\
(634,1.49)
$ 490,211 282,877 (1,3,725)
36,434 (4,2t8) 147,L30
(34) (27,266)
95,549 12,840 1,019,732
(277,793) (2,970) 9,190,025 (9,0r4,r25\
(1,114,803)
)\t q1)
L36,82L (325,235)
(25,000) (4,297\
35,271, 21,376 (38,424) 495,889
$ 457,465 lgL,gg7
5 3 5 (t6,735) (t23,402) (663,1,45\
(620,750)
A '
(19,488) 997,31,0
$ 977,822
206,394 (235,081)
(99,527) (511,730) (639,944)
14,g59 539,845 457,465
$ 997,310
548 A P P E N D I X A . S T A P L E S F I N A N C I A L R E P O R T S
STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements
NOTE A Summary of Significant Accounting Policies
Nature of Operations; Staples, Inc. and subsidiaries ("Staples" or "the Company") pioneered the office products superstore concept and Staples is a leading office products company. Staples operates three business segments: North American Retail, North American Delivery and International Operations. The Company's North American Retail segment consists of the U.S. and Canadian business units that operate office products stores. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products and services directly to customers, and includes Staples Business Delivery, Quill and the Company's Contract operations (Staples National Advantage and Staples Business Advantage). The International Operations segment consists of operating units that operate office products stores and that sell and deliver office products and services directly to customers in 19 countries in Europe, South America and Asia.
Basis of Presentation: The consolidated financial statements include the accounts of Staples, Inc. and its wholly and majority owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation'
All share and per share amounts reflect, or have been restated to reflect, the three-for-two common stock split that was effected in the form of a common stock dividend distributed on April 1.5,2005.
Fiscal Year: Staples' fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 3l-. Fiscal year 2005, 2004 and 2003 consisted of the 52 weeks ended January 28,2006, January 29,2005 and January 31.,2004, respectively'
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management of Staples to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: Staples considers all highly liquid investments with an original maturity of three months or less to be cash equivalents,
Short-term Investments: Short-term investments, which primarily consist of market auction rate preferred stock and debt securities and treasury securities, are classified as "available for sale" under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the short-term investments are reported at fair value, with any related unrealized gains and losses included as a separate component of stockholders' equity, net of applicable taxes. Realized gains and losses and interest and dividends are included in interest income or interest expense, as appropriate. At January 28,2006, the available for sale investments consisted of $410.1 million of market auction rate preferred stock and debt securities, $100.0 million of treasury securities and $83.0 million of municipal securities, with contractual maturities ranging from February 2006 through September 2047.
Receivables: Receivables include trade receivables financed under regular commercial credit terms and other non- trade receivables. Gross trade receivables were $444.8 million at January 28, 2006 and $380.5 million at January 29, 2005 . Concentrations of credit risk with respect to trade receivables are limited due to Staples' large number of customers and their dispersion across many industries and geographic regions.
An allowance for doubtful accounts has been recorded to reduce trade receivables to an amount expected to be collectible from customers based on specific evidence as well as historical trends. The allowance recorded at January 28, 2006 andJanuary 29,2005 was $L6.4 million and $16.5 million, respectively'
Other non-trade receivables were $148.3 million at January 28, 2006 and $121.1 million at January 29, 2005 and consisted primarily of amounts due from vendors under various incentive and promotional programs.
In fiscal year 2000, Staples entered into a receivables securitization agreement, which was terminated on December 29,2003, under which it sold participating interests in non-interest bearing accounts receivable of Quill and Staples' Contract business at a discount to an unrelated third party financier. The transfers qualified for sales treatment under SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". As a result of renegotiating the termination provision in this agreement, on December29,2003, the third party financier sold its interest in the outstanding receivables, which represented $25.0 million, back to the Company.
A P P E N D I X A . STAPLES F I N A N C I A L R E P O R T S STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
Merchandise Inventoies: Merchandise inventories are valued at the lower of weiehted-averase cost or market value.
Private Label Credit Card: Staples offers a private label credit card which is managed by a financial services company. Under the terms of the agreement, Staples is obligated to pay fees which approximate the financial institution's cost of processing and collecting the receivables, which are non-recourse to Staples.
Propeny and Equipmenf; Property and equipment are recorded at cost. Expenditures for normal maintenance and repairs are charged to expense as incurred. Depreciation and amortization, which includes the amortization of assets recorded under capital lease obligations, are provided using the straight-line method over the following useful lives: 40 years for buildings; the lesser of 10-15 years or term of lease for leasehold improvements; 3-10 years for furniture and fixtures; and 3-10 years for equipment, which includes computer equipment and software with estimated useful lives of 3-5 years.
Lease Acquisition Costs: Lease acquisition costs are recorded at cost and amortized using the straight-line method over the respective lease terms, including option renewal periods if renewal of the lease is probable, which range from 5 to 40 years. Accumulated amortization at January 28,2006 and January 29,2005 totaled $61.5 million and $57.9 million, respectively.
Goodwill and Intangible Assets: SFAS No. !42, "Accounting for Goodwill and Other Intangible Assets" requires that goodwill and intangible assets that have indefinite lives not be amortized but, instead, tested at least annually for impairment. Management uses a discounted cash flow analysis, which requires that certain assumptions and estimates be made regarding industry economic factors and future profitability of acquired businesses to assess the need for an impairment charge. If actual results are not consistent with management's assumptions and judgments, the Company could be exposed to a material impairment charge. The Company has elected the fourth quarter to complete its annual goodwill impairment test. In addition, annual impairment tests for indefinite lived intangible assets are also performed in the fourth quarter. As a result of the fourth quarter impairment analyses, management has determined that no impairment charges are required.
The changes in the carrying amount of goodwill during the year ended January 28,2006 are as follows (in thousands):
North American Retail North American Delivery International Operations.
Consolidated
Goodwill 2005 Goodwill
At January 29, 2005 Net Additions At January 28, 2006
$ 3 7 , 1 0 9 $ - $ 3 7 , 1 0 9
395,035 36,336 43t,37r
889,320 20,952 9L0,272
$1.,321,464 $57,288 $7,378,752
Intangible assets not subject to amortization, which include registered trademarks and trade names, were
$153.0 million at both January 28, 2006 and January 29,2005; intangible assets subjecl to amofiization, which include certain trademarks and trade names, customer related intangible assets and non-competition agreements, were
$120.9 million and $90.3 million at January 28, 2006 and January 29, 2005, respectively. At January 28, 2006, intangible assets subject to amortization had a weighted average life of 11.8 years. Accumulated amortization for intangible assets subject to amortization was $33.5 million and $20.8 million at January 28,2006 and January 29,2005, respectively.
Impairment of Long-Lived Assets: SFAS No. 1,44, "Accottnting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Staples' poliry is to evaluate longJived assets for impairment at a store level for retail operations and an operating unit level for Staples' other operations.
Fair Value of Financial Instruments: Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial Instruments" ("SFAS No. 107"), Staples has estimated the fair value of its financial instruments using the following methods and assumptions: the carrying amounts of cash and cash equivalents, short-term investments, receivables and
550 A P P E N D I X A . S T A P L E S F I N A N C I A L R E P O R T S
STAPLES. INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
NOTE A Summary of Significant Accounting Policies (Continued)
accounts payable approximate fair value because of their short-term nature, and the carrying amounts of Staples' debt approximates fair value because of the Company's use of derivative instruments that qualily for hedge accounting.
Revenue Recognition: Revenue is recognized at the point of sale for the Company's retail operations and at the time of shipment for its delivery sales. The Company offers its customers various coupons, discounts and rebates, which are treated as a reduction of revenue.
Sales of extended service plans are either administered by an unrelated third party or by the Company. The unrelated third party is the legal obligor in most of the areas they administer and accordingly bears all per{ormance obligations and risk of loss related to the service plans sold in such area.s.-In these areas, Staples recognizes a net commission revenue at the time of sale for the service plans. In certain areas where Staples is the legal obligor, the revenues associated with the sale are deferred and recognized over the life of the service contract, which is typically one to five years.
Cost of Goods Sold and Occupancy Costs: Cost of goods sold and occupancy costs includes the costs of merchandise sold, inbound and outbound freight, receiving and distribution and store and distribution center occupancy (including real estate taxes and common area maintenance).
Shipping and Handling Costs: All shipping and handling costs are included as a component of cost of goods sold and occupancy costs.
Operating and Selling Expenses: Operating and selling e4penses include payroll, advertising and other operating expenses for the Company's stores and delivery operations not included in cost of goods sold and occupanry costs.
Advertising: Staples expenses the production costs of advertising the first time the advertising takes place, except for the cost of direct-response advertising, primarily catalog production costs, which are capitalized and amortized over their expected period of future benefits (i.e,, the life of the catalog). Direct catalog production costs included in prepaid and other assets totaled $28.4million at January28,2006 and $30.8million at January29,2005. Total advertising and marketing expense was $588.2 million, $526.0 million and $492.7 million for fiscal years 2005, 2004 and 2003, respectively.
Pre-opening Costs: Pre-opening costs, which consist primarily of salaries, supplies, marketing and distribution costs, are expensed as incurred,
Stock Option Plans: Staples accounts for its stock-based plans under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and provides pro forma disclosures of the compensation expense determined under the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") as amended by SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No. 148"). Under APB No. 25, since the exercise price of Staples' employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by SFAS No. L48, which also requires that the information be determined as if Staples had accounted for its employee stock options granted subsequent to January 28, 1995 under the fair value method of that Statement. For options granted prior to May L,2005, the fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. For stock options granted on or after May 1, 2005, the fair value of each award is estimated on the date of grant using a binomial valuation model. The binomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the binomial model takes into account variables such as volatility, dividend yield rate, and risk free interest rate. However, in addition, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. For these reasons, the Company believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than that value calculated using the Black-Scholes model.